Is Pandora Really Short-Changing Songwriters?

It’s been a rough week for Pandora, which is taking a beating from the likes of Pink Floyd and David Lowery of the band Cracker over how much — or, to hear the musicians say it, how little — it pays in royalties for the tunes you’re streaming.

The Floyd and Lowery, whom you might know for the song “Low,” are among those decrying Pandora’s attempts to reduce the royalties it pays to artists. This ongoing fight has been waged in Congress, in the courts and, of course, online. It all started in earnest last year when Pandora lobbied hard for the Internet Radio Fairness Act.

The bill, which musicians said would “gut the royalties that thousands of musicians rely upon,” would have changed how royalty rates paid by streaming services are determined and almost certainly reduced the amount paid to artists. The bill didn’t get far, though, because it was introduced too late in the session for any action before the new Congress was sworn in.

Such complaints belie the “we’re all in this together” attitude Pandora — which would not comment for this story — presents in emails sent to musicians inviting them to be part of “a very productive, and encouraging dialogue” about the future of the music industry. “Every hour that moves from AM/FM to the web is good news for musicians, as AM/FM pays zero royalties to performers,” Pandora founder Tim Westergren wrote in one email made public.

That statement may, in and of itself, be true, but it is hardly the whole story.

The systems that decide who gets paid every time a song is played on the radio or streamed online are confusing, but here are the basics. Songs, for the most part, have two copyrights: One for the songwriter, and one for the performer. Under the current system, those who perform the music do not, as Westergren wrote, earn royalties from terrestrial radio play, but they do earn royalties from digital streaming and satellite radio under the 1995 Digital Performance Right in Sound Recordings Act.

That’s because each radio format — terrestrial (aka AM/FM radio), satellite and internet — have entirely different rules and regulations about royalty payments. The reason terrestrial radio does not pay performance royalties is that, unlike other formats, broadcast radio acts as advertising for the artist, which results in increased sales that provide additional revenue for the musicians. It’s a somewhat specious argument, and worth noting the United States is among the few industrialized nations that doesn’t provide performance royalties for radio play.

Songwriters, however, are paid royalties no matter the radio format, with royalty payments tracked and ultimately delivered to songwriters via one of three performance rights organizations: Broadcast Music Inc.; the American Society of Composers, Authors, and Publishers; and the Society for European Stage Authors and Composers (SESAC). Those organizations keep track of how often a song is played, then calculate payments using what could best be described as arcane math.

“The number one concern of the individual songwriters and composers we represent is getting fair payment from digital services,” Paul Williams, president of the American Society of Composers, Authors and Publishers, told Wired. “Whenever I meet with members from all genres of music who are struggling to make ends meet, that’s the thing they ask about most. They know that streaming is growing, and they don’t want to be left out in the cold in terms of having their creative work valued fairly.”

Williams says Pandora wants the public to believe it cares about songwriters and artists, “but Pandora’s actions speak louder than their words. The fact is, they are suing ASCAP to lower payments to songwriters.” The company’s senior VP of marketing, Lauren Iossa, told Wired that the Society wants “all new entrants in the music industry to succeed,” but “Pandora isn’t a struggling startup anymore.”

“They are a publicly traded company with more than 70 million listeners and their investors are making millions on streaming music created by songwriters and composers,” she said. “They don’t need special treatment. They can and should pay a fair market rate.”

Pandora, obviously, doesn’t see it that way. It filed suit against ASCAP in November, arguing the current royalty agreement is “ill-suited and not reasonable.” It wants a federal court in New York to set “reasonable fees and terms” through 2015.

The issue, of course, is defining “reasonable.” The sticking point in discussions between ASCAP and Pandora has been the January 2012 agreement — itself the result of a lawsuit, settled in January 2012 — between ASCAP and the Radio Music License Committee. That agreement, which dictates royalties paid by terrestrial radio stations, created a “standard deduction” policy for radio stations’ new media revenue that would, for those reporting revenue on a cash basis, offer a discount of 12.5 percent of revenue reported for each billable period.

Pandora believes it should be covered by the same guidelines, but ASCAP and Broadcast Music Inc. disagree. They argue that because Pandora is solely a new media company, it doesn’t have the costs associated with traditional broadcasting, such as regulatory fees imposed by the FCC. So Pandora decided to press the issue last month when it bought KXMZ-FM, an FM station in Rapid City, South Dakota.

“From our perspective, what we’re trying to do is make sure that we operate at parity with our biggest competitors,” Pandora attorney Christopher Harrison told NPR. “If iHeart Radio’s personalized Internet radio service pays a particular rate, we think we’re entitled to operate under that same rate.”

iHeart Radio is owned by ClearChannel Communications, the nation’s largest owner of full-power radio stations.

The move did indeed draw attention to the issue. But not in the way Pandora might have hoped. Broadcast Music Inc. walked away from its negotiations with Pandora and filed suit against Pandora. In a statement to Wired, BMI said it wants the court “to set reasonable, market driven fees for Pandora” and notes “this is the first time the organization has resorted to litigation on fees in the digital arena in the 18 years since it signed the first music industry copyright license for the performance of music on the internet.”

Pandora isn’t backing down. In a post on the company blog, Westergren characterized the disputes with ASCAP and BMI as “the actions of a few small, but powerful publishers seeking to gain advantage for themselves,” actions which have “caused all songwriters’ royalties to go down.”

For those playing along at home, that comes to $2.54 per play for Sirius, $0.18 per play for terrestrial radio, and $0.00003 per play for Pandora.

Pandora wouldn’t comment, so we have no way of verifying that figure. But tech blogger Michael Degusta notes on his blog The Understatement that Lowery’s comments “are patently untrue.” Degusta argues Lowery gets a cut of a pie that also serves the other songwriters and the music publisher (BMI in this case). What’s more, Pandora also pays a performance royalty of about $0.0011 every time a song is played. By Degusta’s math, Pandora paid $1,370 in royalties for “Low” and Lowery earned “around $234.”

“Whatever one thinks of the fairness of those numbers, they’re all clearly far larger than $16.89,” Degusta wrote.

Additionally, as Westergren pointed out as his blog post, the audience metrics are somewhat different for streaming radio compared to terrestrial radio.

“Each spin on Pandora reaches a single person, compared to a “play” on FM radio that reaches potentially millions of people,” Westergren wrote. “In other words, a million spins on Pandora might be equivalent to a single play on a large FM station. If major market FM stations paid the same rates as Pandora, based on audience, some would be paying thousands of dollars for every song they played.”

You could argue the logic of that point — it fails, for example, to consider streaming radio being played in public stations — and neither does it change the question of whether Pandora and other streaming services are paying artists a fair rate. That’s a point Degusta made when he noted, “None of this means Pandora ought to pay less in royalties. On the contrary, it seems quite likely that others should be paying more.”

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